Perspectives
26 June 2020
Spring is the seasonal peak of US milk production. This year, however, demand for milk plummeted, with Class III milk futures, the most heavily traded, losing two-thirds of its value between February and April on the Chicago Mercantile Exchange due to the impact of COVID-19. US milk futures are priced based on cheese, butter, dry whey and skim milk powder. Since milk is a highly perishable good, most milk produced is priced based on these end-products. Cheese is the most-consumed dairy product in the US, and because of this, Class III is the most heavily traded milk future on the Chicago Mercantile Exchange.
What was dramatic about the loss in demand was unforeseen bottlenecks in the supply chain. Ordinarily, there tends to be a higher proportion of consumption of dairy products when eating away from home as opposed to at home. However, the widespread COVID-19 lockdown orders contributed to a precipitous decline in away from home eating. In addition to direct declines in demand, this also caused logistical and packaging problems, creating an oversupplied market. For example, because workers were afraid of catching COVID-19, there were fewer truck drivers available to transport dairy products. Packaging problems were a result of the sudden switch to eating at home: the packaging and size of product is different when shipping to a restaurant versus a grocery store. It costs not only money but also takes time to make that switch at the plant level (source: United States Department of Agriculture, Reuters).
In the US, there have been several government programmes to support dairy farmers who are being paid a lower price for their products because of the drop in demand. For example, cheese is the most heavily consumed dairy product, and US demand for cheese dropped 10 per cent in April 2020 versus the prior year (source: United States Department of Agriculture, Customs Data, Macquarie). The consequences are potential bankruptcies, lower income, higher unemployment and lower consumer spending, to name a few. As a result, any dairy producer with an Adjusted Gross Income under $US900,000 and at least 75 per cent of their income derived from farming, ranching or forestry-related activities was and is eligible for government support.
The economic impacts in the US, EU and New Zealand will be the greatest. Yet, with these governments having already swiftly stepped in, large cash pay outs have already happened. The result is prices of certain dairy products have increased substantially from the recent lows thanks in part to the US government programme “Farmers to Families Food Box.” For example, the price of cheese in the US is actually higher than it was before the COVID-19 crash in March (source: CME, USDA).
Chase Bender, Macquarie agricultural commodities analyst
